Selling non-covered shares in mutual funds

[yosemite798]

 I inherited a non-IRA account (holding mutual funds) from my father.

 I plan to sell some shares from three mutual funds in 2023.

The basis has been updated based on my dad’s date of death.  

VTI (ETF)-Vanguard total stock market index fund

VTI has FIFO cost basis method. My dad purchased VTI shares in 2011

VTI cost basis: $167.68

VTSAX-Vanguard total stock market index fund

VTSAX has average cost basis method. My dad purchased VTSAX shares in 2011

VTSAX cost basis: $81.80

VFSUX – Vanguard short term investment grade fund

VFSUX sale may involve tax loss harvesting. I will post my question in a separate thread.

Tax filing status: joint filing with my wife  | Estimated income for 2023: $234,959 | tax brackets: 24%

2023 income sources: W-2, mutual fund dividends, rental property income

Home state: TX

I have the following questions:

1. what is the best way to minimize tax when selling mutual fund shares?
2. When selling shares in VTI and VTSAX, is there a way to tell I am selling covered or non-covered shares? If I need to Vanguard this question, please let me know.
3. How much federal tax we need to pay if I plan to sell mutual fund shares that worth $129,241.00?
4. When using tax form 8949 to report sale of mutual fund shares (VTI and VTSAX), are they counted as long term covered transactions? My dad holds VTI and VTSAX for more than 5 years before they transferred under my name.
5. Which cost basis method should I use for the mutual funds inherited from my father in order to maximize tax efficiency?

“Choosing the right method for calculating your cost basis will determine in part how much you'll pay in taxes for the current year, and how detailed your recordkeeping will need to be.” Quoted from Vanguard website.

[JohnB5677]

1. what is the best way to minimize tax when selling mutual fund shares?
   1. AReview your portfolio, and harvest any losses you may have.  Items in your personal portfolio can offset what you received from your dad.
2. When selling shares in VTI and VTSAX, is there a way to tell I am selling covered or non-covered shares? If I need to Vanguard this question, please let me know.
   1. Your broker would be your best resource.  Your broker is required to report covered cost basis to both you and the IRS. Noncovered share basis is sent only to you. 
3. How much federal tax we need to pay if I plan to sell mutual fund shares that worth $129,241.00?
   1. The proceeds of $129,241 are only half of the issue.  The other half is the cost basis. The net of proceeds less cost basis is the taxable amount.
   2. You may be subject to The Net Investment Tax. It is an additional 3.8% tax on married couples with incomes over $250,000.
4. When using tax form 8949 to report sale of mutual fund shares (VTI and VTSAX), are they counted as long term covered transactions? My dad holds VTI and VTSAX for more than 5 years before they transferred under my name.
   1. Any capital gain or loss that is the result of selling inherited stock is always long-term. This rule applies regardless of how long you or the original owner owned the shares.
5. Which cost basis method should I use for the mutual funds inherited from my father in order to maximize tax efficiency?
   1. The cost basis will be the value of the fund as of the date of your dad passing.

If this does not completely answer your question, please contact us again and provide some additional details.

[Bsch4477]

When you report dates acquired you will put “inherited “. Inherited shares sales are always long term. Any net profit is taxed at your marginal tax rate. 

[yosemite798]

Hello JohnB5677 and Bsch4477, 

 Thanks for answering my questions regarding sell non-covered shares in mutual funds. 

1. "The proceeds of $129,241 are only half of the issue.  The other half is the cost basis. The net of proceeds less cost basis is the taxable amount."the cost basis for VTI is: $167.68, current market price as of 3/7/2023: 200.38. If I understood you correctly, I only pay taxes on $32.70 (the net of proceeds less cost basis). Please let me know if this is correct. 
2. for my question number 5, I meant to say which cost baiss method should I choose so it has good record keep and help me minimize the tax after sell mutual fund shares. If this is broker specific question, please let me know. 

[Bsch4477]

You pay tax on the proceeds minus the cost of the asset. There is no one right answer to cost basis method. Average cost is generally simpler so you don’t have to designate which shares to sell, but feel free to discuss with broker 

[GeorgeM777]

Question 1 - Yes, you pay tax on the net difference--proceeds less cost basis--multiplied by the number of shares you are selling. 

Question 2 - When selling mutual fund shares, the IRS default method is Average Cost.  With Average Cost, cost is derived by dividing the total dollar amount invested in a particular fund position by the number of shares held prior to the trade date.  Shares are removed in FIFO (First in, First Out) order.  

You may be able to designate a different cost method for your account other than the default method.  Some of the other cost methods are: LIFO (Last In, First Out), HCOST (High Cost, shares with the highest cost are sold first), LCOST (Low Cost, shares with the lowest cost are sold first), and Specific Identification (identifying specific lots to be sold, although such identification must be made with the broker at the time of the trade and no later than close of business on the day the trade settles). 

It is possible that not all brokers offer the same cost methods.  Moreover, it may be possible to change the default cost method without speaking to a broker, and instead, using your brokerage account settings to make the appropriate change in cost method. 

@yosemite798